Know the rules for deducting disaster, casualty and theft losses
Americans have faced significant damages to their properties and businesses in recent years as hurricanes, wildfires, tornadoes and other natural disasters have struck the country. Hurricane Irene alone caused between $7 and $13 billion in damages, and hundreds of tornadoes that hit the Midwest during the first few months of 2012 led to millions of dollars in losses. Natural disasters come at a great personal cost to homeowners who lose their property and assets. However, those who suffer damages due to disasters, casualties and even theft may deduct these on their taxes.
The Internal Revenue Service defines a casualty loss as damage, destruction or loss of property from a sudden, unexpected or unusual event. This includes hurricanes, tornadoes, earthquakes, fires and volcanoes. However, homeowners may not deduct losses from normal wear of their homes.
It's also important that taxpayers are aware that losses covered by insurance agencies cannot be included in the deduction unless they filed a timely reimbursement, and they have reduced their loss by the amount of the reimbursement.
In order to deduct casualty losses, individuals must first determine the fair market value of their personal property, which is typically calculated as the price they paid for the item and increased or decreased by improvements, appreciation or depreciation. Once they have determined this value - and subtracted any insurance reimbursements from the amount - they must follow two other rules to determine how much they can deduct. First, they must deduct a flat $100 from their losses. After this, they must reduce the amount by 10 percent of their adjusted gross income. The remaining amount is the figure they can write off on their taxes as an itemized deduction.
In addition, it's also crucial to understand that the amount of a homeowner's casualty or theft loss is the lesser of a property's decreased value or adjusted basis. For example, if an individual has a piece of artwork that was purchased for $15,000 but appreciates to $35,000, they will start at the adjusted basis of $15,000. In other instances, if a homeowner owns a piece of furniture that was purchased for $5,000 and falls in value to $3,000, individuals must start their deduction at $3,000. Then they must follow the $100 and 10 percent rule to determine the total allowable deduction.
Individuals who have lost property to casualties or theft should consult a tax preparer immediately to ensure they fully understand the process and are making accurate deductions.
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